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Surviving Southwest's invasion
US Airways is determined to slash expenses - again - and operate more like its discount competitors.
By Tom Belden
Inquirer Staff Writer
With no fanfare, Southwest Airlines has slipped another nonstop route into its Philadelphia schedule. Like the rest of Southwest's service here, it is a direct attack on a US Airways route: a Saturday-only flight to San Diego starting in September.
The additional flight will bring Southwest's service from Philadelphia to as many as 29 daily nonstop flights, still only a fraction of the almost 400 a day operated by US Airways. But with every move Southwest makes, it forces US Airways to lower its fares for last-minute travel, nibbling away at the airline's revenue as it struggles to stay in business.
US Airways says it is determined to survive the Southwest invasion by slashing its costs by 40 percent beyond cuts already made, and operating more like the low-cost airlines that are giving it fits.
"We're doing something that's never been done before," US Airways senior vice president Chris Chiames said. "It's the Extreme Makeover of the airline industry," he said, alluding to a reality TV show.
US Airways realized last fall that higher-than-expected fuel prices and relentless discounting by low-cost airlines were undermining revenue projections it made when it emerged from bankruptcy six months earlier. The situation got worse when Southwest announced plans to start operating in Philadelphia.
Southwest's entry prompted US Airways' chief executive officer, David N. Siegel, to call for more labor concessions. But Siegel's inability to work with the airline's union leaders forced his resignation in April, and he was replaced by board member Bruce R. Lakefield, who is particularly popular with pilots.
US Airways began negotiations with its pilots' union this month, and plans to start talking to groups representing other employees later this summer, with a goal of having new money-saving agreements in place by early fall, company spokesman David Castelveter said.
Union spokesman Jack Stephan said yesterday that the pilots would give the company a detailed proposal this week on changes it would accept in pay, benefits and work rules.
Last week, the Association of Flight Attendants said it was prepared to start negotiations to revise its contract if it could get some additional financial information from the company.
Beyond that, neither the company nor the pilots' union would discuss the progress of negotiations or specific aspects of the talks.
The challenge facing US Airways from Southwest in Philadelphia is not unique. Other older, major airlines - American, Continental, Delta, Northwest and United - are confronting similar problems.
Yesterday, United submitted a revised application to the Air Transportation Stabilization Board for a federal loan guarantee to help it come out of bankruptcy after the board turned down two previous tries. And Delta Air Lines Inc. chairman Gerald Grinstein said last week that his airline was fighting for its survival, unable to raise fares and desperate for wage concessions from its pilots.
While most airlines are carrying full loads of leisure passengers this summer, low fares and fuel costs are keeping the carriers from recovering financially as the economy gets better, industry analysts say.
"The driving force behind this situation... is the rapid spread of low-cost competition and the effect that has had on pricing of tickets used by business passengers in the domestic market," Philip Baggaley, an airline analyst with Standard & Poor's Ratings Services, testified this month at a hearing of the U.S. House aviation subcommittee.
In nine years, from January 1995 to January 2004, low-cost carriers have gone from flying 336 domestic U.S. routes to serving 1,375 routes. They now account for about one-quarter of domestic U.S. airline traffic.
With higher fuel costs in the revenue equation, analyst Samuel Buttrick of UBS Securities estimates, the older major carriers will lose $2 billion to $2.5 billion this year, on top of the $23 billion they have lost since 2001. Early this year, he and other analysts were expecting the industry to lose $500 million or less.
US Airways paid almost $1 a gallon for fuel in the first quarter, one-fifth more than it expected to when it came out of bankruptcy last spring. But that is not as big a problem as all the other expenses - from labor to leasing airport gates - to keep an old hub-and-spoke airline running.
"The problem stems from core and personnel costs that... along with fuel costs produce a total operating cost that is higher than passengers are willing to pay," according to the June issue of Unisys R2A Scorecard, an industry newsletter.
The negotiations with US Airways' 28,000 employees have a goal of reducing the airline's labor costs by $800 million a year. In two previous rounds of concessions in 2002 and 2003, the airline trimmed annual labor costs by $1.9 billion.
US Airways is trying to trim an additional $800 million from its annual costs by changing the way it sells tickets, serves passengers in airports, flies its planes, and operates its Philadelphia and Charlotte, N.C., hubs.
The airline already has reduced service at Pittsburgh, once its major hub, and is offering more nonstop flights from Boston, New York and Washington, three cities with large populations where it has a major presence. The airline is increasing the amount of flying done in 50- and 70-seat regional jets by US Airways Express commuter carriers, where pilots make less money.
Baggage handling, particularly at Philadelphia International Airport, is another area in which US Airways has said it must improve. If it doesn't, it could face another disaster like last summer's, when thousands of customers' bags missed flights after repeated breakdowns of an aging conveyor belt. US Airways expects to have a $2.7 million overhaul of the Philadelphia baggage system completed in August, three months behind schedule.
The next phase of cutting costs is expected to start this fall, after the airline has new labor agreements in place to give it more flexibility in scheduling aircraft crews and airport workers.
The airline wants to increase the time between connecting flights at Philadelphia and Charlotte. Traditionally, the airlines have operated about eight, 90-minute banks of arriving and departing flights a day at a hub, creating a frenzy of activity and intense use of the facilities. US Airways hires scores of part-time workers at its hubs to help handle peak demand. At the hubs, its airplanes usually spend an hour or so on the ground between flights, compared with 25 or 30 minutes for Southwest.
By spreading out flights more throughout the day, the airline can reduce the number of airplanes, gates and employees it needs. The airline will save money on fuel if these methods mean less taxiing for aircraft between gates and runways.
US Airways also says it intends to save money by making its Web site more attractive and easier to use. The airline has a goal of increasing the number of tickets sold on its Web site from 10 percent to 20 percent by the end of the year.
Finally, US Airways has set as a goal simplifying its fare structure. Customers have complained for years that major carriers such as US Airways have too many fares, the rules for using them are complicated, and they are unreasonably high for last-minute trips.
But the airline still is a long way from applying its lower simplified "GoFares" to its whole system. Last week, US Airways extended the lower prices to airports in the Washington area. But on many routes where there are no discounters - such as Philadelphia to Detroit - a last-minute round-trip can still cost more than $1,000.
"In one market, you have GoFares," said Kevin P. Mitchell, chairman of the Business Travel Coalition, of Radnor. "But in another market it's still 'gotcha' fares."
US Airways is determined to slash expenses - again - and operate more like its discount competitors.
By Tom Belden
Inquirer Staff Writer
With no fanfare, Southwest Airlines has slipped another nonstop route into its Philadelphia schedule. Like the rest of Southwest's service here, it is a direct attack on a US Airways route: a Saturday-only flight to San Diego starting in September.
The additional flight will bring Southwest's service from Philadelphia to as many as 29 daily nonstop flights, still only a fraction of the almost 400 a day operated by US Airways. But with every move Southwest makes, it forces US Airways to lower its fares for last-minute travel, nibbling away at the airline's revenue as it struggles to stay in business.
US Airways says it is determined to survive the Southwest invasion by slashing its costs by 40 percent beyond cuts already made, and operating more like the low-cost airlines that are giving it fits.
"We're doing something that's never been done before," US Airways senior vice president Chris Chiames said. "It's the Extreme Makeover of the airline industry," he said, alluding to a reality TV show.
US Airways realized last fall that higher-than-expected fuel prices and relentless discounting by low-cost airlines were undermining revenue projections it made when it emerged from bankruptcy six months earlier. The situation got worse when Southwest announced plans to start operating in Philadelphia.
Southwest's entry prompted US Airways' chief executive officer, David N. Siegel, to call for more labor concessions. But Siegel's inability to work with the airline's union leaders forced his resignation in April, and he was replaced by board member Bruce R. Lakefield, who is particularly popular with pilots.
US Airways began negotiations with its pilots' union this month, and plans to start talking to groups representing other employees later this summer, with a goal of having new money-saving agreements in place by early fall, company spokesman David Castelveter said.
Union spokesman Jack Stephan said yesterday that the pilots would give the company a detailed proposal this week on changes it would accept in pay, benefits and work rules.
Last week, the Association of Flight Attendants said it was prepared to start negotiations to revise its contract if it could get some additional financial information from the company.
Beyond that, neither the company nor the pilots' union would discuss the progress of negotiations or specific aspects of the talks.
The challenge facing US Airways from Southwest in Philadelphia is not unique. Other older, major airlines - American, Continental, Delta, Northwest and United - are confronting similar problems.
Yesterday, United submitted a revised application to the Air Transportation Stabilization Board for a federal loan guarantee to help it come out of bankruptcy after the board turned down two previous tries. And Delta Air Lines Inc. chairman Gerald Grinstein said last week that his airline was fighting for its survival, unable to raise fares and desperate for wage concessions from its pilots.
While most airlines are carrying full loads of leisure passengers this summer, low fares and fuel costs are keeping the carriers from recovering financially as the economy gets better, industry analysts say.
"The driving force behind this situation... is the rapid spread of low-cost competition and the effect that has had on pricing of tickets used by business passengers in the domestic market," Philip Baggaley, an airline analyst with Standard & Poor's Ratings Services, testified this month at a hearing of the U.S. House aviation subcommittee.
In nine years, from January 1995 to January 2004, low-cost carriers have gone from flying 336 domestic U.S. routes to serving 1,375 routes. They now account for about one-quarter of domestic U.S. airline traffic.
With higher fuel costs in the revenue equation, analyst Samuel Buttrick of UBS Securities estimates, the older major carriers will lose $2 billion to $2.5 billion this year, on top of the $23 billion they have lost since 2001. Early this year, he and other analysts were expecting the industry to lose $500 million or less.
US Airways paid almost $1 a gallon for fuel in the first quarter, one-fifth more than it expected to when it came out of bankruptcy last spring. But that is not as big a problem as all the other expenses - from labor to leasing airport gates - to keep an old hub-and-spoke airline running.
"The problem stems from core and personnel costs that... along with fuel costs produce a total operating cost that is higher than passengers are willing to pay," according to the June issue of Unisys R2A Scorecard, an industry newsletter.
The negotiations with US Airways' 28,000 employees have a goal of reducing the airline's labor costs by $800 million a year. In two previous rounds of concessions in 2002 and 2003, the airline trimmed annual labor costs by $1.9 billion.
US Airways is trying to trim an additional $800 million from its annual costs by changing the way it sells tickets, serves passengers in airports, flies its planes, and operates its Philadelphia and Charlotte, N.C., hubs.
The airline already has reduced service at Pittsburgh, once its major hub, and is offering more nonstop flights from Boston, New York and Washington, three cities with large populations where it has a major presence. The airline is increasing the amount of flying done in 50- and 70-seat regional jets by US Airways Express commuter carriers, where pilots make less money.
Baggage handling, particularly at Philadelphia International Airport, is another area in which US Airways has said it must improve. If it doesn't, it could face another disaster like last summer's, when thousands of customers' bags missed flights after repeated breakdowns of an aging conveyor belt. US Airways expects to have a $2.7 million overhaul of the Philadelphia baggage system completed in August, three months behind schedule.
The next phase of cutting costs is expected to start this fall, after the airline has new labor agreements in place to give it more flexibility in scheduling aircraft crews and airport workers.
The airline wants to increase the time between connecting flights at Philadelphia and Charlotte. Traditionally, the airlines have operated about eight, 90-minute banks of arriving and departing flights a day at a hub, creating a frenzy of activity and intense use of the facilities. US Airways hires scores of part-time workers at its hubs to help handle peak demand. At the hubs, its airplanes usually spend an hour or so on the ground between flights, compared with 25 or 30 minutes for Southwest.
By spreading out flights more throughout the day, the airline can reduce the number of airplanes, gates and employees it needs. The airline will save money on fuel if these methods mean less taxiing for aircraft between gates and runways.
US Airways also says it intends to save money by making its Web site more attractive and easier to use. The airline has a goal of increasing the number of tickets sold on its Web site from 10 percent to 20 percent by the end of the year.
Finally, US Airways has set as a goal simplifying its fare structure. Customers have complained for years that major carriers such as US Airways have too many fares, the rules for using them are complicated, and they are unreasonably high for last-minute trips.
But the airline still is a long way from applying its lower simplified "GoFares" to its whole system. Last week, US Airways extended the lower prices to airports in the Washington area. But on many routes where there are no discounters - such as Philadelphia to Detroit - a last-minute round-trip can still cost more than $1,000.
"In one market, you have GoFares," said Kevin P. Mitchell, chairman of the Business Travel Coalition, of Radnor. "But in another market it's still 'gotcha' fares."
